With payment history accounting for 35% of your credit history, it’s important to pay your bills in full and on time to maintain a positive credit score. Sometimes, however, life has other plans and it’s not always possible to get your payments in by the due date.
Making even one payment 30 days late can seriously hurt your score and the negative information can remain on your credit report for up to 7 years. Collection accounts are one of the worst culprits when it comes to damaging your credit. Helping your score to rebound after a collection account has been reported takes time but there are some things you can do to speed the process along.
Collection accounts and your credit
Once you’ve been delinquent on one of your credit accounts for a certain period of time, typically 180 days, the debt may be sold to an outside collection agency. How a collection account affects your score depends on several factors, including the amount owed and how far behind you are on the payments.
A single late payment can reduce your score by anywhere from 40 to 100 points. As a general rule, the higher your score is start, the more points you stand to lose when a collection account shows up on your credit report.
Collection accounts and the statute of limitations
Every debt is subject to a statute of limitations, which determines how much time a collection agency has to sue you for an unpaid debt from the date of the. The clock typically starts ticking beginning on the date of the last activity on the account. Statute of limitations on debt vary from state to state so it’s important to check with your state attorney general’s office on what the time frame is where you live.
Once the statute of limitations expires on a debt, you can no longer be sued for it but you shouldn’t assume that a collections agency will let you off scot-free. There are some agencies that specialize in buying old debts cheaply and going after the consumers to fork over the cash. One tactic they use is re-aging accounts to make it appear as if there’s still time left under the statute of limitations. This means that if you have an unpaid collections debt you could still be forced to pay up at some point if you’re not careful.
If you acknowledge that you do in fact owe the money, either verbally, in writing or by making a payment, that can be enough to restart the statute of limitations. When dealing with a debt collector, it’s always best to say as little as possible and make sure you ask for written validation of the debt.
The Fair Debt Collection Practices Act requires collection agencies to provide proof that a debt is valid within 30 days if a consumer requests it. If you don’t think you owe the debt or you can prove that it’s outside the statute of limitations, requesting validation can help you get a debt collector off your back.
Does paying off collection accounts improve your score?
When it comes to collection accounts, you have two options. You can either pay it off right away or bide your time and wait for the statute of limitations to run out. While going the second route means you don’t have to be afraid of getting sued, it doesn’t eliminate your obligation to pay the debt, nor will it automatically remove it from your credit. If the statute of limitations is three years, for example, a collection account can still stay on your report until it hits the seven-year mark.
There are some different situations in which paying off your collections debt can work in your favor, resulting in an increase in your credit score. If you have medical debts that have gone to collections, for example, you should consider paying them off in full sooner rather than later.
While they’re not weighed as heavily as credit cards or loans, paying them off can have more of a positive impact on your score than the others. That’s because the latest FICO and VantageScore models don’t include paid collection accounts in their scoring calculations. You probably never thought collections and credit score could positively be used in the same sentence, but when medical debts are paid off it can add as many as 25 points to your score.
So, the next step is to ask yourself how do I pay off collections on my credit report? If you have multiple accounts in collections, you want to start with paying off the most recent ones first. The older a collection account is the less weight it has in your score calculations over time. Giving the newest collection debts priority can minimize the long-term impact of a negative payment history.
Getting collections removed from your credit
Does removing collections improve credit score? The answer is yes but the more important question is how to go about doing it. The most straightforward option is to ask the collection agency to remove the debt from their reports once you’ve paid up. This is also known as a “pay for removal” deal.
Unfortunately, this doesn’t often work since collection agencies are contractually unable to remove the negative information — that’s up to the credit reporting agencies they work with. While this may seem frustrating, it’s designed to promote the accuracy of credit reports and create a true reflections of consumers’ creditworthiness.
That being said, collection agencies can’t report information that’s incorrect or incomplete. If you have paid collection accounts on your credit report that are still showing up with a balance, you can dispute the inaccurate information.
The credit reporting bureau is required to investigate your claim within 30 days and remove or update any errors or inaccuracies. Getting those black marks taken off your credit report can help to reverse some of the damage to your score.
Pay off your debt
When an account goes into collections, it’s beneficial to pay it off as soon as possible to minimize damage to your credit. Allowing collection debts to linger can haunt you for years to come and impact your ability to get new credit down the line. Aside from that, paying off delinquent accounts can help you avoid the numerous phone calls and letters you’re sure to get from a collection agency.
Paying off collections debt can not only help your credit score but it can provide you with a better financial standing overall. If you’re planning to buy a car, apply for a mortgage or refinance a home you already own, lenders are going to take your credit history into account.
Your credit history determines your payment options and interest rates so the better your score, the better your options. While paying off old debts may not cause a drastic improvement in your score overnight, it will show lenders that you’re serious and responsible when it comes to your finances.
